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Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market

  • Hiroshi Konno

    (Institute of Human and Social Sciences, Tokyo Institute of Technology, Tokyo, Japan)

  • Hiroaki Yamazaki

    (Department of Social Engineering, Tokyo Institute of Technology, Tokyo, Japan)

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    The purpose of this paper is to demonstrate that a portfolio optimization model using the L 1 risk (mean absolute deviation risk) function can remove most of the difficulties associated with the classical Markowitz's model while maintaining its advantages over equilibrium models. In particular, the L 1 risk model leads to a linear program instead of a quadratic program, so that a large-scale optimization problem consisting of more than 1,000 stocks may be solved on a real time basis. Numerical experiments using the historical data of NIKKEI 225 stocks show that the L 1 risk model generates a portfolio quite similar to that of the Markowitz's model within a fraction of time required to solve the latter.

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    File URL: http://dx.doi.org/10.1287/mnsc.37.5.519
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 37 (1991)
    Issue (Month): 5 (May)
    Pages: 519-531

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    Handle: RePEc:inm:ormnsc:v:37:y:1991:i:5:p:519-531
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